Liberty. It’s a simple idea, but it’s also the linchpin of a complex system of values and practices: justice, prosperity, responsibility, toleration, cooperation, and peace. Many people believe that liberty is the core political value of modern civilization itself, the one that gives substance and form to all the other values of social life. They’re called libertarians.

Saturday, July 28, 2012

ECB Will Now Print Money Directly ... But Why?

Mario Draghi

European equities rose and peripheral bond yields fell on Friday on growing expectations of ECB
action to bring down Spanish and Italian borrowing costs, but concerns
about possible German opposition to such a move kept risk appetite in
check. Euro zone governments and the European Central Bank are preparing
to intervene on financial markets, French daily Le Monde reported,
citing unnamed sources. The report came a day after ECB President Mario Draghi
boosted risk assets across the globe with his pledge do whatever it
takes within the bank's mandate to defend the single currency. "Now all
of a sudden everybody thinks he (Draghi) is going to start printing. He
has backed himself into a corner, if he doesn't come up with anything
then he could be in trouble," said Ioan Smith, strategist at Knight
Capital. − ReutersDominant Social Theme: We will never surrender! We will fight them everywhere! Why? ... We don't know.Free-Market News: The market has rejected the euro and the EU.
Now Draghi proposes to reject the market. In a groundbreaking reversal,
he has indicated he will print currency to buy eurozone sovereign debt.
Mario Draghi, president of the European Central Bank (ECB), will do
"whatever is necessary" to ensure a solvent euro. Draghi made the
comments at an investor conference at the Olympics. Professional
investors like John Fox, director of research at Fenimore Asset
Management, believe it may mark a turning point in the four-year old
crisis.
"When the head of the ECB comes out and says he's willing to do
anything," Fox is quoted as saying. "That's code for 'We are going to
agree to resolve this issue.'"
Of course, there may be another reason why Draghi is doing this now
but it is nothing that Fox would ever allude to. We'll get to it toward
the end of this article.
In any case, one wonders how much of Draghi's statement is merely an
attempt to "talk up" the market and how much is grounded in reality. To
be sure, he is obviously trying to sound tougher about using an array of
monetary weapons at his disposal.
In an article about Draghi's announcement, the Wall Street Journal
writes that Draghi "has had enough." Like a previously abashed partner
in a bad business partnership, Draghi is going to the show the market
who is "boss." He calls the euro "irreversible," and claims the "euro
zone has the power to defeat market speculation."
Draghi can make a case for generating price inflation now because the
expense of government borrowing is impeding the ECB's ability to
conduct monetary policy and to support private sector transactions. He
thus has a mandate to "lower ... premiums."
Of course, by that logic anything in the marketplace that affects
government debt adversely is fair game for the ECB. Please note: The
German people were sold the EU and the euro as something of benefit ...
not as a "transfer union." Draghi may manage to do what he intends, but
he is running close to the "red" line.
The ECB sees that interest rates on government bonds cripple private
borrowing. It needs to stimulate demand for bonds by buying paper in
crippled PIGS countries. Nonetheless, as the WSJ article points out, the
ECB is "prohibited from monetizing debt, or buying bonds directly from
issuing governments,"
For a while, Draghi tried stuffing European banks full of euros and
then basically demanding that banks purchase domestic debt, which would
tend to drive down rates. But even €1 trillion wasn't enough. Now, as
the Journal article points out with considerable understatement, "it
seems Mr. Draghi is willing to ignore restrictions on debt
monetization."
There is apparently simply no limit to what Eurocrats will do to keep
the EU afloat. The Journal writes that "in theory the ECB is only
limited by how fast it can run its printing presses ... essentially the
speed of light."
What this coy phrase means is that Draghi quite literally presses a
button to provide money to designated banks. There is no money anymore,
only electronic digits. Despite Draghi's awesome (and unconstitutional)
power, he is still subject to the court of public opinion. If he acts
too rashly, the all-important German public will push back hard.For wholesale ECB action not to be inflationary, countries from
Greece to Spain would have to stick to their promises of fiscal prudence
and to produce primary government surpluses over the next few years–in
other words to paying back their debt once interest payments are
excluded. Unfortunately, history shows that once market pressure is
relaxed on governments, they tend to backslide on spending. (WSJ)
Is Draghi speculating that the price inflation that will inevitably
result from his actions shall not prove repugnant to Germans because it
may help boost German wages? That seems to be the idea. What Draghi may
have decided to do is inflate initially and then try to control
inflation after-the-fact ... something that central banks are very bad at, regardless of their stated sentiments to the contrary.
Yet there is no getting around the reality that Draghi and his
cohorts are pushing boundaries ... again. The EU was sold as a trade
union but now the socialist Eurocrats at the top obviously intend a repeat of Charlemagne's empire.
Euro leaders going back several decades or more are on record as
stating cynically that emplacing a monetary union before a political one
was bound to cause problems. The idea was that once a recession
occurred, the monetary pressure would inevitably cause closer political
ties.
But the Internet has informed many people about this apparent
bait-and-switch that it is perhaps not proving so easy as expected in
the 21st century to move from an economic one to a political one.
There is of course another perspective within the context of the EU's
never-ending crisis as alluded to above. This constitutes the most
cynical point of view of all, and would advance the idea that it doesn't
much matter if Draghi's latest strategy doesn't work.Conclusion: What it IS doing is establishing a precedent for more ECB over-reaching, constitutional or not. That may be the real reason.